NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded to 'A' from 'A-' the rating on the series of bonds listed at the end of this report issued on behalf of the North Shore Long Island Jewish (NSLIJ) Obligated Group.
The Rating Outlook is revised to Stable from Positive.
Bonds are secured by revenue pledge of the obligated group (OG) and by mortgages on primary health care facilities of the NSLIJ OG. The OG represented 95% of system assets and 94% of system revenues in 2013. Fitch reports on the performance of the NSLIJ system.
KEY RATING DRIVERS
STABLE AND PREDICTABLE OPERATING RESULTS: The upgrade to 'A' is based on the system's significant and growing presence in the New York metropolitan service area, its manageable debt burden and operating stability reflected in management's ability to meet budgeted performance, albeit at lower than historical levels, as the system continues to make major investments in system growth opportunities.
LARGE INTEGRATED SYSTEM: Led by a stable, long term management team with a clearly defined vision for the system, NSLIJ has grown into a large, integrated health system with revenues of $7 billion in 2013, an increase of 28% since fiscal 2010. The system has an expansive clinical footprint that covers most of Long Island and large portions of New York City, has a large employed physician faculty component and has further diversified its operations by launching an insurance company.
MANAGEABLE DEBT BURDEN: NSLIJ has a moderate debt burden with coverage of pro forma maximum annual debt service (MADS) by EBITDA of 3.7x through the June 30, 2014 interim period, which includes a potential private placement in early fall 2014 of up to a maximum $250 million. MADS coverage is consistent with Fitch's 'A' category median and the low pro forma MADS as a percentage of revenues at 2.3% is favorably to the 'A' median. The moderate debt burden is a key credit strength mitigating the lower than median operating results and liquidity metrics.
COMPRESSED OPERATING MARGINS: The system operating margin has been compressed due to flattening inpatient volumes and expenses related to investment in system growth and diversification. Going forward, expectations for operating margin have been lowered to low 1% range as the system initially subsidizes its insurance division and continues its ambulatory and physician network expansion.
MODEST BUT STABLE LIQUIDITY: Cash and unrestricted investments, equal to $1.98 billion through the interim period, reflect strong cash flows, though historically liquidity metrics have been lower than Fitch's 'A' category medians. Days cash on hand (DCOH) at 106.3 days and cash to pro forma debt, including the planned private placement issuance but none of the proceeds of the new debt, at 97.3%, remain low for the category.
OPERATING STABILITY: Fitch views the large operating footprint and leading market share, as key strengths which provide a high degree of credit stability to the system. Fitch expects the system to maintain stable operating results generating sufficient cash flow from operations necessary to finance its large capital plan in the near to medium term, leading to improved margins and liquidity, as the system reaps benefits from the growth and diversification initiatives.
With corporate headquarters in Great Neck, NY, NSLIJ includes five tertiary-care teaching hospitals - North Shore University Hospital-Manhasset (764 certified beds), Long Island Jewish Hospital (583 beds), Staten Island University Hospital North (508 beds), Lenox Hill Hospital (634 beds) and Southside Hospital (341 beds); seven community hospitals; three specialty hospitals, three long-term care facilities; and other health care related entities, including a newly launched insurance division CareConnect, one of the only provider owned insurance companies in its market.
The upgrade to the 'A' rating and revision of the Outlook to Stable reflect the system's large operating footprint and significant market presence, management's consistent ability to meet projected operating performance, as well as the system's solid coverage of debt and still relatively moderate debt burden. Fitch believes that the system geographic coverage and vertical integration will enable NSLIJ to produce stable operating performance, sufficient to produce debt service coverage consistent with the 'A' medians, while maintaining liquidity over the next several years.
LARGE INTEGRATED SYSTEM
The system's large operating footprint and leading market share in its five county PSA are viewed as key credit strength. NSLIJ has achieved significant growth over the past decade, doubling its revenues from $3.4 billion fiscal 2003 to $7 billion in total revenue in fiscal 2013 (year-end Dec. 31). NSLIJ has been slowly increasing its market share of its PSA, reported at 28.8% in 2013, up from 26.8% in 2010. The system has completed several acquisitions and major projects during this period and continues to invest in geographic coverage. The free standing emergency department in Manhattan - Lenox Hill HealthPlex, opened July 9th in the former O'Toole medical building in Greenwich Village and volumes have exceeded expectations, with the bulk of the admissions going to Lenox Hill Hospital. The renovations to the O'Toole building continue and will include space for ambulatory surgery and physician offices. The system is planning to spend an additional $100 million on updating this facility.
CareConnect, the system's insurance arm which was launched in late 2013, is slowly building up enrollment. A favorably low medical expense ratio, a wide and growing network of providers (10,000 physician providers, including several large groups and a number of hospital providers in the tri-state area, none of which have their own insurance product) and a focus on positive consumer experience is expected to result in a breakeven point based on 40,000 enrollees in the commercial product by mid-2015, exceeding the initial projections. The New York metropolitan insurance area is extremely competitive, and CareConnect has had to make pricing adjustments in order to remain competitive in the small group market. Management estimates the total investment for the initial two year period at $44 million. The CareConnect support systems, which have been put into place in order to monitor utilization, cost and quality of care, have been scaled up to be able to support a vastly expanded enrollee base, which will spread fixed costs as the enrollment increases over time, expected to top 75,000 by 2017. While the entrance into the insurance market represents a risk, Fitch believes that given NSLIJ's strong brand name recognition in the market and its extensive physician and facility network, the system should be able to achieve its targeted membership goal. While compressing operating profitability in the near term during the start-up phase, Fitch views the insurance companies positively, as they should benefit the system's operations over the longer term.
COMPRESSED OPERATING MARGIN
The system reported income from operations of $84 million on revenues of $7 billion in fiscal 2013, equal to an operating margin of 1.2% and operating EBITDA margin of 6.8%. The fiscal 2013 operating gain was a small decline from the prior year's $97.9 million, but performance was in line with management's projections of lower operating margin in the 1% range for 2013-2014 period. Through the six month interim period ended June 30, 2014, NSLIJ reported operating income of $38.1 million, equal to an operating margin of 1.1% and operating EBITDA margin of 7%. The lower profitability during this period is driven by declining inpatient volumes, expenses associated with the ambulatory and physician network growth and the investment in CareConnect, continuing implementation of the electronic health record and increased depreciation expenses related to completion of several recent projects. Management recognizes that the execution of the full capital plan requires generating sufficient cash flow from operations and is committed on scaling back the capital plan should the required level of profitability not be achieved. The fiscal 2014 budget is for $80 million operating profit, which appears achievable based on the year-to-date profitability.
A positive development is the successful implementation of a financial turnaround at Lenox Hill, which reported operating income of $31.5 million in fiscal 2013, after several years of, albeit declining, losses. Fitch continues to believe that the Lenox Hill acquisition, as well as the acquisition of the O'Toole building, were important strategic gains for NSLIJ, providing the system a significant foothold in Manhattan, while expanding and strengthening its presence in key areas of Queens.
MANAGEABLE DEBT BURDEN
The system has a $2.2 billion capital plan for the 2014-2016 period roughly equals 190% of projected system depreciation expense. Approximately 55% of the capital needs are projected to be generated from operating cash flow, with 34% from debt issuance, including 15% from existing debt, and 11% from philanthropy. A taxable private placement, currently estimated to be between $175 million-$250 million, is expected to be issued in mid-September (Fitch conservatively uses the higher par amount and MADS). Proceeds of the private placement are intended to be used for general corporate purposes and capital expenditures in 2014 and future years. The debt is expected to have a 16 year final maturity, with amortization starting in 2021 and to be priced off the U.S. 10-year treasury rate. NSLIJ had solid coverage based on existing MADS of $155.5 million of 3.7x in fiscal 2013. Coverage of pro forma MADS of $166 million, based on maximum par amount for the private placement issuance of $250 million, was 3.7x through the June 2014 interim period, consistent with the 'A' category median of 3.8x and pro forma MADS is a still low 2.3% of system revenues, favorable to the 'A' category median of 3.1%.
Following the issuance of the proposed debt, NSLIJ will have approximately 93% of its long-term debt in fixed rate and pays down approximately $65 million of principal each year, allowing it to keep its debt load relatively unchanged. Management is committed to monitor and reevaluate capital plans in order to maintain its balance sheet. The system's five swaps have a notional par of $107 million had a negative $6.3 million mark-to-market at June 30, 2014 and no collateral posting was required at that time.
MODEST BUT STABLE LIQUIDITY
Supported by solid cash flow from operations NSLIJ's absolute liquidity has grown by over 30% since 2010, but liquidity metrics have historically lagged the rating category. Unrestricted cash and investments through the interim 2014 period were reported at $1.98 billion, equal to 106.3 DCOH, cushion ratio of 11.9x and 97.3% pro forma cash long-term debt, all of which are weaker than Fitch's 'A' category medians of 199.2 DCOH, 17x cushion and 131.2% cash to debt. However, including the potential $250 million of proceeds from the planned September private placement, but reducing cash by the $110.2 million of draws on a line of credit at June 30, 2014, would improve DCOH to 113.8 days, and would have the effect of increasing cash to debt to 104.2%. NSLIJ uses the lines of credit to fund construction costs of projects for which it will eventually issue debt and to bridge the receipt of capital pledges. Maintaining liquidity will remain crucial as the system continues to execute its capital plan which requires significant cash-flow from to be generated from operations. Management will periodically review and adjust the capital plan in order not to cause deterioration of its balance sheet metrics and projects DCOH to be at 110 days or higher during the near term.
The obligated group covenants to provide bondholders with annual and quarterly financial disclosure as well as operating statistics. Current financial disclosure for the OG is excellent and includes a balance sheet, income statement, utilization statistics, cash flow statement and management discussion and analysis.
Fitch upgrades the following bonds to 'A' from 'A-':
--$250,000,000 NSLIJ taxable revenues bonds series 2013A;
--$135,000,000 NSLIJ taxable revenues bonds series 2012B;
--$48,930,000 Dormitory Authority of the State of New York revenue bonds, series 2012A;
--$363,180,000 Dormitory Authority of the State of New York revenue bonds, series 2011A;
--$243,615,000 Dormitory Authority of the State of New York revenue bonds, series 2009A;
--$125,000,000 Dormitory Authority of the State of New York revenue bonds, series 2009B-D;
--$60,890,000 Dormitory Authority of the State of New York revenue bonds, series 2009E;
--$140,965,000 Dormitory Authority of the State of New York revenue bonds, series 2007A;
--$44,400,000 Dormitory Authority of the State of New York revenue bonds, series 2007B;
--$110,350,000 Dormitory Authority of the State of New York revenue bonds, series 2005;
--$17,990,000 Dormitory Authority of the State of New York revenue bonds, series 2003;
--$13,550,000 Dormitory Authority of the State of New York revenue bonds, series 1998A*.
*The rating for this series is an underlying rating.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. Nonprofit Hospitals and Health Systems Rating Criteria, May 30, 2014;
--'Revenue-Supported Rating Criteria, June 16, 2014.
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
Revenue-Supported Rating Criteria